South Africa has seen a slew of economic data released over the last week with some positive indicators mixed in with the bad.

The most prominent is the mid-term budget policy statement (MTBPS) which exposed the country’s deteriorating finances of the country and the National Treasury’s credible-but-challenging solutions to help keep head above water for the next few years.

According to economists from the Bureau for Economic Research and Nedbank, however, there were also some better indicators, such as the better-than-expected trade surplus recorded for September, and positive talk coming from the African Growth and Opportunity Act (Agoa) forum being held in Johannesburg.

The rise

Agoa, which grants duty-free access to the US market for over 1,800 products from eligible Sub-Saharan African countries including South Africa, is set to expire in 2025.

African countries are asking for a 10-year extension with minimal changes to the Act to provide certainty to investors.

“Importantly, they seek more flexible criteria and a relaxation of the annual criteria review process. Current eligibility criteria mean that the US already stated that Gabon, Niger, Uganda and the Central African Republic are ineligible for the renewal due to concerning human rights issues,” the BER said.

US President Joe Biden supports renewal; however, he has also called for changes to be made.

According to SA Trade and Industry Minister Ebrahim Patel, trade ministers from the US and eligible nations have agreed to minor tweaks to Agoa – though he reiterated that a major rewrite was not needed.

Despite pushback from some politicians in the US, calling for South Africa to be held accountable for its ties to Russia, most analysts expect the country to remain a part of the Act.

The pause

Another small positive for South Africa is the trade surplus widening to R13.1 billion in September from a downwardly revised R12.6 billion in August.

The latest reading beat expectations for a slightly smaller surplus (R12.1 billion).

While this is ultimately a positive thing, economists at Nedbank warned that imports (-3.8% month-on-month) and exports (-3.2%) still contracted over the month, although imports declined at a steeper rate

This also need to be weighted against longer-term data: over the year, exports contracted by 9.2% yoy following a 4.1% increase in August, and the cumulative trade surplus for the year to date (January to September 2023) amounted to R43 billion in September, lower than the R179.9 billion achieved over the same period in 2022.

“Despite largely shrugging off the impact of slowing domestic and global demand, the trade outlook remains quite uncertain.

“Overall conditions are expected to moderate further as the impact of higher interest rates globally continues to filter through economies, containing demand and eventually weighing on trade performance.

“Further downside risks are expected to stem from the country’s significant infrastructure constraints.”

The fall

Despite the positives, the Treasury and markets had to contend with the big crash to reality regarding South Africa’s finances in the MTBPS.

“While the National Treasury’s monthly releases of revenue data meant that we already had some idea of the likely revenue shortfall for this fiscal year, sizeable downward revisions to revenue projections in the outer years of the fiscal framework are of concern,” the BER said.

Revenue between 2024/25 and 2025/26 is expected to fall short of the 2023 Budget estimate by R121.4 billion. Importantly, these revisions are greater than the adjustments to non-interest expenditure over the period, which explains the higher peak in debt as a percentage of GDP.

Nedbank flagged government expenditure, noting that consolidated expenditure growth for the current year is higher at 5.4% versus 3.4% projected in February, reflecting a higher wage bill following the higher-than-expected wage settlements and debt service costs.

Even though the National Treasury expects growth to moderate, this will be at a higher average of 4.6% per year, and higher social transfers will keep non-interest expenditure elevated.

The most worrying feature of the budget, however, is debt service costs, which are projected to surge by 14.9% this fiscal year and by 8.7% on average over the next three years.

“It climbs to an average of 5.3% of GDP between 2023/24 and 2025/26, up from 4.9% of GDP estimated in February due to higher interest rates, a weaker exchange rate, and a wider fiscal deficit,” Nedbank said.

“As a result, interest payments remain the fastest-growing expenditure item.”

National Treasury still forecasts a primary budget surplus (balance before debt service costs) in 2023/24, but it falls to 0.3% of GDP from 0.8% before rising to 1.7% in 2026/27.

According to National Treasury, a primary surplus of 1.3% of GDP is needed to stabilise the debt stock. The wider budget deficit pushes the public debt stock higher.

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